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Health insurance subsidies: the new cash cow?

March 8, 2011 at 8:17 am

Austin Frakt

Something in the news seemed familiar. Here’s a paragraph from Brian Beutler in a piece yesterday on repealing the 1099 provision:

The health care law subsidizes insurance coverage for consumers who make under 400 percent of the federal poverty level. As currently written, people on the cusp of that 400 percent line are protected if they received a modest raise or bonus that bumps them into a higher income bracket. The House bill, which passed last week, would eliminate that protection, and require those consumers to pay back their entire subsidy — a penalty that would amount to thousands of dollars.

And here’s what Don Taylor explained about the temporary doc fix that passed last December:

The primary [doc fix] pay-for is [this]: the ACA specified that if your income rose during the year such that your end of year income was higher than was projected (which is how amount of subsidy/tax credit was figured), then the maximum amount an individual had to pay back to the government was $250 for individual or $400 for family coverage. Now there is a sliding fee scale based on how much your income turns out to be, with much larger pay backs in force. If your income is 200% poverty, you have to repay up to $600, if it is 450-500% of poverty, you have to repay up to $3,500, with sliding scale in between.

So the ACA’s subsidies are starting to function as a cash cow, paying for changes to the law.

At the moment we’re still talking about individuals and families paying back subsidies if they received more than they should have based on what their income turned out to be. In some sense that’s only fair. Why should someone get a bigger subsidy than their income qualifies them for?

However, as Aaron and others have pointed out, there is an incentive problem with sharp breaks in subsidies. If one can manage to stay just below the line (e.g. by working less) one retains the subsidy. If one earns slightly more, it can be snatched back. That’s not a good incentive. There may be money in clawing back subsidies — money to pay for tweaks to the law — but it may not be worth the cost in incentives to do so. How much should we milk this cash cow?

Incentive breaks are always among the tricker problems in policy, but I think they can be overcome with thoughtful program design. For example, in the case of food stamps, I’ve heard of $200 in food stamps being taken away on a $150 raise — that clearly doesn’t make sense.

Crossing an incentive break still has to make you better off than you were before — if you earn $1,000 more, you should lose up to $999 in subsidies.

SSI and EITC benefits are phased down – above a certain limit, for every marginal dollar you earn, you lose $0.50 of the benefit (iirc). That’s a good way to design an incentive break.

As relates to the health law, though, the original intent (again, iirc) was that families should be held harmless if their income fluctuates. Income often fluctuates among low-income households. Being too aggressive about clawing back subsidies could pose a hardship for the individuals involved and it would be administratively complex. Of course, the Republicans are all out to undermine the law if they can’t repeal it, and this definitely undermines the law.